Things are looking up for Australia's massive services sector

Led by a lower Australian dollar and surging demand from Asia, the prospects for Australia’s massive services sector are looking up.

The much-hyped economic rebalancing, although slower than what many people would like, is clearly under way with the nation’s vast tourism and education industries leading the recovery in activity.

Paul Bloxham, chief Australia and New Zealand economist at HSBC Bank, has taken a look at the recent improvement in Australian services exports, stating that the burgeoning middle classes in Asia provide Australia significant trading opportunities outside of mining exports.

Here’s a snippet from Bloxham’s excellent research note released this morning:

“Asia’s rising middle class incomes also present Australia with significant trading opportunities outside of mining. Most apparent is demand for services, particularly education and tourism. These are already quite large exports for Australia. Over the past year, education exports were Australia’s third largest export earner, at around AUD18bn, behind only iron ore and coal. Indeed, in the past couple of years, services exports have shifted from being a net drag on GDP growth to being a net contributor and have contributed more to GDP than resources exports over the past year.”

The charts below, supplied by Bloxham, reveal the rapid improvement seen in Australian services exports, particularly for education, tourism, and to a lesser degree, financial services.

Breaking down the improvement in tourism and education exports further, Bloxham suggests that the lower Australian dollar is also assisting the sector.

“In addition to rising Asian demand for services, Australia’s services exports have also been supported by the lower exchange rate,” notes Bloxham.

“This has lowered the price of Australian service providers relative to those overseas, which has both encouraged an increase in foreign visitors and encouraged Australians to travel locally rather than abroad. China is driving much of the growth in services exports.”

The charts below tell the story. Chinese annual visitor arrivals jumped by 135% over the past five years, rising from 400,000 to 940,000, the second largest of any nation behind New Zealand, while Chinese international student enrolments have increased by 11% so far in 2015 compared to the same period a year earlier.

The charts reinforces the point that the Australian economy is far more than just “China’s quarry”. The lower Australian dollar, something that is making the nation more competitive compared to other developed, highly skilled English-speaking nations, along with the rising middle classes in China, India and ASEAN nations, presents Australia with countless opportunities in the decades ahead.

While many of the headlines of late focus on weakness in commodity prices, the “CAPEX cliff” and concerns about China’s economy, there is more than enough evidence at hand to suggest Australia’s economic transition away from mining investment to other drivers of growth is gaining traction.

There is little doubt that the full transition will take time, and result in prolonged periods of sub-trend economic growth and weak national incomes growth. However, in the absence of another global downturn – something Australia has no bearing over – the prospects for the domestic economy are not grim.